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As Bruce Rauner is sworn in Monday as Illinois’ 42nd governor at the Prairie Capital Convention Center, a half-mile away, government lawyers will file papers asking the state Supreme Court to reinstate a law that would make massive changes to the public employee pensions system.

It’s a law that Rauner lobbied against, arguing it didn’t go far enough to resolve Illinois’ worst-in-the-nation unfunded pension liability. It’s also a law public employee unions fought in the legislature and in the courts, contending the Illinois Constitution expressly prohibits diminishing retirement benefits once they’ve been handed out.

Regardless of what the court decides, the pension issue will remain the most significant one confronting Rauner and the state government he takes over. The state public pension system is nearly $105 billion short. That debt has led to declining credit ratings and higher costs when the state borrows money.

Perhaps most urgently, the rising pension costs are taking up an ever-growing share of the government checkbook, leaving less money to spend on education, health care, public safety and social services. As Rauner plots his first budget, state spending on pensions is expected to rise by $600 million, to more than $6.6 billion, according to the legislature’s budget forecasting agency. That’s about 24 cents of every tax dollar put into the state’s all-purpose general funds bank account.

To make matters worse, much of that state pension spending isn’t even paying for current retirement benefits — 80 percent of the money covers borrowing and previous failures to put enough dollars into the system.
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The pension shortfall also is exacerbated by the pension systems’ decision to lower how much they think they’ll make off of the billions invested. The pension systems had been criticized for expecting unrealistically high rates of return that helped mask the true extent of what the state owed.

The future of the state’s pension funding will play out this year following a campaign for governor that saw public employee unions front and center in the contest between Rauner, the Republican governor-elect, and the man he will succeed, Democratic Gov. Pat Quinn.

Unions pumped millions of dollars into the campaign in an effort to stop Rauner, who peppered his Republican primary campaign rhetoric with harsh anti-labor attacks before softening them in the later stage of his general election campaign against Quinn.

It’s not that the unions were pleased with Quinn. They had little love for him after he signed into law the major pension measure that vastly changed retiree benefits and extended retirement ages in an effort to ameliorate the state’s pension debt over 30 years.
Quinn is going away, but the fate of the law he signed is in serious legal jeopardy. With Rauner taking over, the pension debt remains unsettled. As has been the case on many issues, the Republican has offered general answers about his preferences for dealing with public pensions and how he’ll respond if the new law is struck down.

“We have some very specific thoughts on that, but we’ll be developing those with the General Assembly,” Rauner said during a postelection visit to the Capitol. “We need a comprehensive, fair overhaul of the pension system, and we’ll make that a top priority.”

The pension crisis that Rauner faces is among a string of financial problems that have accumulated for decades under Democrats and Republicans in Illinois government. Rauner has vowed to use his business acumen to usher in streamlined, restructured governance, comprehensive tax reform and an era of business and job growth.

Illinois’ pension money woes largely stem from politicians failing to make the employer’s share of contributions to systems covering state and university workers, teachers outside Chicago, elected state officials and judges.

Adding to the mess, the pension systems’ returns on investment were battered by the recession of 2000-03. Then, during the tenure of now-imprisoned former Gov. Rod Blagojevich, the state sold bonds to pay its share of pension contributions or took holidays to escape fully paying into the system. Then, the Great Recession hit, driving the debt into acceleration mode as investments tanked.

For years, Quinn vowed to address the pension shortfall, even introducing a cartoon “Squeezy the Pension Python” to demonstrate how retirement costs were squeezing dollars from education and social services. In December 2013, lawmakers and the governor finally enacted sweeping changes in public worker pension benefits.
Gov. Quinn says post-Blagojevich stability his greatest accomplishment
Gov. Quinn says post-Blagojevich stability his greatest accomplishment

The new law would increase the age for workers younger than 46 to be able to start collecting a pension. It also would sharply curb annual cost-of-living adjustments from the current 3 percent annual compounded increase retirees receive. And it would put a ceiling of about $110,000 on the salary used to calculate pensions.

The unions quickly sued. In November, just days after Rauner was elected, Sangamon County Circuit Judge John Belz ruled the law unconstitutional, conflicting with what’s known as the pension clause of the state constitution. That provision describes membership in any public pension system to be “an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

Lawyers for the state, seeking to uphold the law, argued government’s sovereign or police powers trumped the pension clause, contending the risk to pay for government services and continued pensions was sufficient to overcome the prohibition against diminished retirement benefits.

Belz, however, ruled the state’s courts have consistently held the pension clause’s protection of benefits is “absolute and without exception,” including attempts by the state to use its sovereign or police powers.

That sent the case on appeal to the Illinois Supreme Court. Written arguments from the state are due Monday, the same day Rauner takes office. Justices will hold oral arguments in March. There is no time frame for a ruling.

But the justices have given some indications that they may throw out the landmark state pension law. In July, the state’s highest court ruled in a 6-1 decision that state subsidized health care benefits for public retirees were protected by the constitution’s pension clause.

“In light of the constitutional debates, we have concluded that the provision was aimed at protecting the right to receive the promised retirement benefits, not the adequacy of the funding to pay for them,” Justice Charles Freeman wrote for the majority.

Freeman’s choice of words is seen as a critical crack in the state’s argument that its police powers and need to fund essential services trump the protections granted by the constitution.

Asked recently if the state should begin working on a “Plan B” while the pension law is debated by the state Supreme Court, Rauner said his “preference is probably to wait until the Supreme Court rules, so we have some ground rules for what probably works and what won’t work. I think that’s a smarter way to do it.”

But there is no obligation for the court to provide any guideposts for Rauner or Illinois politicians — Belz, the trial court judge, certainly did not.

“It’s a good thing to hope for. But to pass (the court’s) muster? I don’t know what those things are,” said Richard Dye, an economist on the faculty of the Institute of Government and Public Affairs at the University of Illinois.

In his successful campaign, Rauner spoke generally about wanting to shift public employees from receiving a defined pension benefit into becoming members of a defined contribution plan similar to a 401(k)-style system.

Rauner has said public workers should be able to keep the benefits they have already accrued, but, moving forward, go into a defined contribution system. He also has said public safety workers should stay in the current system. And, with 80 percent of public employees not eligible to receive Social Security, Rauner has said he favors some unspecified plan to create a retirement safety net.

But it’s unclear whether Rauner’s concept is constitutional, as he maintains, or how it would address the current unfunded pension liability since payments would go into a new retirement system rather than address the shortfalls in the current system.

“Not only does it not solve the problem, but it makes it worse in the near term,” Dye said. “Whatever the solution is will cost something, and I don’t know how it would be implemented. It’s hard to add (Rauner’s concept) up as a fiscal benefit for the state.”

Dye said the issue of pension funding ties into the rest of the state’s money woes, with revenues failing to match an unsustainable rate of spending. But even as a new governor takes the stage, Dye said there is little trust among Democrats and Republicans as well as among taxpayers and the state’s politicians to resolve the problems.

“We need some sort of a multiyear compact as to how much revenue can be raised, what spending cuts we need to hold the line on and some transitional borrowing,” he said.

“The problem with these package deals, the state has always needed some sort of multiyear solution, but there is no trust or incentives which would hold together a multipart solution. There’s no reason people in Illinois would or should believe that a political package deal would hold,” Dye said. ViaIllinois government worker pension system remains big issue for Rauner